Why the hell do we have a system where ALL money is debt from someone else?

hatrickpatrick

Think about this:
Money gets into "circulation" by a central bank LENDING it to some local bank which then lends it to its customers. They use it, for example, to open a shop and pay their workers, etc.

The banks then demand this back eventually with interest, and the central bank in turns demands that the local banks repay with interest.

So presumably, those banks then have to borrow more money to pay off the interest. I can't see any other way it would work:

Central bank lends €100 at 10% for one year. They expect €110 back at the end of that loan.

Bank lends someone the €100 at 20% so they will make a profit. They now want €120 back so they can give €110 to the central bank and pocket the €10 left over as profit.

Where the **** does the extra €20 come from if there's no other way for money to get into circulation than by borrowing?

It this not a prime reason for the fact that the financial system breaks down so damn often? It's crazy! It's like if I'm the only person in the world who is allowed to brew Guinness, and I give out a can of it for free on the proviso that I eventually get that can back, plus ANOTHER can. Since I'm the only one who can make the booze. They have to borrow the second can from me, which now created even more debt. It's a never ending cycle of debt!

Have I missed something or is this honestly how it works? And who the hell decided that this barking mad system of money supply was actually a good idea?

Économiste Monétaire

Moved.

hatrickpatrick

Économiste Monétaire wrote: »

Moved.

Fair enough, sorry about that although to be fair I specifically didn't put it here as it's a general question about economics and not specific to Ireland.....?

Piri

hatrickpatrick wrote: »

Have I missed something or is this honestly how it works? And who the hell decided that this barking mad system of money supply was actually a good idea?

Google Zeitgeist

Scofflaw

Piri wrote: »

Google Zeitgeist

This is Politics, not CT.

moderately,
Scofflaw

hatrickpatrick

Scofflaw wrote: »

This is Politics, not CT.

moderately,
Scofflaw

I've just googled it anyway, and it doesn't actually answer the question.
To put this even more simply:

If the central bank lends out €10 billion (and this is the first €10bn ever created)and demands 10% interest, where the hell is the extra billion going to come from unless it too is borrowed from the central bank?

nearyj

Unfortunately it is the case. The following video explains it rather well. It's a 5 part series on YouTube called "money as debt".

https://www.youtube.com/watch?v=vVkFb26u9g8

You should also check out this link relating to the book "confessions of an economic hitman" and how debt is used as leverage.

https://www.youtube.com/watch?v=yTbdnNgqfs8

On a more positive note, tomorrows Friday.

Edit: can anyone explain to me how the YouTube link works? Shouldn't the video be embedded?

Piri

This is a virtual money
It is created virtually on computer as there is no gold standard
This money does not exist
That is why we are here in this situation

hatrickpatrick

nearyj wrote: »

Unfortunately it is the case. The following video explains it rather well. It's a 5 part series on YouTube called "money as debt".

https://www.youtube.com/watch?v=

http://www.youtube.com/watch?v=vVkFb26u9g8&feature=youtube_gdata_player

You should also check out this link relating to the book "confessions of an economic hitman" and how debt is used as leverage.

https://www.youtube.com/watch?v=

http://www.youtube.com/watch?v=yTbdnNgqfs8&feature=youtube_gdata_player


Edit: can anyone explain to me how the YouTube link works? Shouldn't the video be embedded?

Thanks for the videos, will check them out in a few minutes!
PROTIP: Edit that post and replace the b][/b]url]<Full youtube video address>[/url[b][/b to simply [youtube]Video ID[/youtube]

If this is indeed the case, why don't we change the system? It sounds mind blowingly stupid and riddled with problems. Why are we still using it if we know it doesn't really work?

On a more positive note, tomorrows Friday.

It is indeed
I shall be making my contribution to the exchequer in the form of an exorbitant tax on booze :P

Scofflaw

hatrickpatrick wrote: »

Think about this:
Money gets into "circulation" by a central bank LENDING it to some local bank which then lends it to its customers. They use it, for example, to open a shop and pay their workers, etc.

The banks then demand this back eventually with interest, and the central bank in turns demands that the local banks repay with interest.

So presumably, those banks then have to borrow more money to pay off the interest. I can't see any other way it would work:

Central bank lends €100 at 10% for one year. They expect €110 back at the end of that loan.

Bank lends someone the €100 at 20% so they will make a profit. They now want €120 back so they can give €110 to the central bank and pocket the €10 left over as profit.

Where the **** does the extra €20 come from if there's no other way for money to get into circulation than by borrowing?

It this not a prime reason for the fact that the financial system breaks down so damn often? It's crazy! It's like if I'm the only person in the world who is allowed to brew Guinness, and I give out a can of it for free on the proviso that I eventually get that can back, plus ANOTHER can. Since I'm the only one who can make the booze. They have to borrow the second can from me, which now created even more debt. It's a never ending cycle of debt!

Have I missed something or is this honestly how it works? And who the hell decided that this barking mad system of money supply was actually a good idea?

One major addendum to that - Central Banks aren't the only banks that create money through debt. Commercial banks also create the money they lend you - that's what fractional reserve lending is about. The banks can loan (roughly) ten times what they have in assets - so, in your example, if the Central Bank creates €100 and gives it to a commercial bank, the commercial bank can then lend out €1000.

Since that money is based on confidence that you can pay back your debts, yes, the entire system can come crashing down. In the case of our property bubble, for example, the banks lent large sums of debt money so that people could buy assets (houses) that were valued at huge prices because they were valued at high prices (originally because everybody wanted a house and could easily access the money to buy one, but eventually simply because prices were going up).

Every time people start thinking that it would be a good idea to loosen the rules on how money is created - which is what happened in the late 80s to early 90s - a cycle is set in train. It starts with the extra money being funnelled into money-starved businesses, which is the "good" bit, because the economy actually grows in a meaningful way, with extra work being done and extra business happening. It then almost invariably comes to the point where businesses just don't really need more cash, thanks, and the prosperity generated means that lots of people have more money than they can spend. This is the dangerous bit, because the businesses - the real economy - can't soak up any of that spare money, so investment has to go elsewhere. It invariably starts going into whatever assets are rising as a result of the prosperity - in our case, that meant that because house prices were rising along with our prosperity in the first part of the cycle, houses became an attractive investment vehicle. So the second part of the bubble consists of the banks creating yet more money/debt in order to allow people to buy assets at inflated and inflating prices. If you allow the inflated assets to be part of the way bank reserves are calculated - which we did - then your banks can lend even more money as the assets they're buying inflate in price, which inflates the price of the assets yet further, allowing the banks to lend more, and so on.

Sadly, the whole thing is based on confidence that the cycle can keep going, and it can't, so at some point the music stops. People start pulling money back out of assets, the asset prices start falling, and even more people want to pull out. If you've allowed your banks to use those asset prices as their reserves - as we did - then the banks are suddenly hugely exposed, and no longer have the assets they're required to have in order to back their loans.

The usual course of such a bubble is about a decade - they've been running ever since the Dutch really came up with the first proper credit markets in the 1700's. We had, if you remember, a mini-slump in about 2001 when the dotcom bubble burst - but Greenspan pumped the US economy by dropping the Federal rate dramatically, which led directly to the US' housing bubble, and indirectly to everybody else's.

Interest rates - the cost of buying debt money from the banks - control the speed with which the cycle moves, but what seems to make the cycle work is ease of access to credit in the first place. If the banks limit mortgage lending to 2.5 times annual salary, then you can't develop a mortgage credit bubble - and hence a property bubble - in the first place, because mortgages are locked to the rates of pay. Under those circumstances the size of mortgage people are willing to take on is also very sensitive to interest rates, because it's very clear how much of your income mortgage repayments will eat up. Lower interest rates can create faster house price growth, but not indefinitely.

However, if the banks are willing to lend to you based not on your salary, but on the very basis that you're buying an appreciating asset (a house), then interest rates become of less relevance, because in theory your wealth is no longer salary-backed - instead, your wealth consists of your earning potential and the rise in value of the asset you're buying. In this scenario, it would take massive hikes in interest rates to cool the bubble, because if house prices are rising at 10% per year, interest rates are going to need to be above that. Unfortunately, such a hike in interest rates would also affect business borrowing, because a business needs to know that it can get a higher rate of return from the money borrowed than borrowing the money costs it in interest - and for businesses outside the bubble, that's unlikely.

So the problem with debt-based money is when the creation of it moves out of step with growth in the real economy. If it were possible to allow the banks to create money at exactly the rate at which businesses can use it to create real value - that is, to do more business, create useful products or services - then you can in theory have a maximum rate of economic growth without a bubble developing. And that economic growth pays back the debt - because essentially debt money is created in the expectation that value will be created to match it in the future.

The corresponding disadvantage of non-debt based money is that you can only create money by creating value - but where do you get the money to expand your business and create value from? The answer seems to be that you have to go to someone who already has more wealth than they can spend, and borrow the (real) money from them. They will, naturally enough, charge you interest to do so - which means that they will become wealthier yet.

It seems to me that debt-based money has the advantage of allowing anyone with a bright idea to borrow in order to create value - maximising creativity and increasing the spread of wealth across society - whereas non-debt based money has the opposite effect of repressing creativity and drawing more money towards the already wealthy.

Obviously, these are cartoons compared to the reality. However, it's something that bears a lot of thinking about, because - from a Green perspective - we're beginning to run up against the limits to growth in several ways. We seem to have a choice between allowing debt-based money to continue, even though it's predicated on unlimited growth, and hoping that the creativity it unlocks will allow us to bypass the resource constraints that are already on the horizon - or scaling back and no longer predicating our model of money on unlimited growth. In the latter case, non-debt money is what we'll need to turn to.

cordially,
Scofflaw

Scofflaw

hatrickpatrick wrote: »

I've just googled it anyway, and it doesn't actually answer the question.
To put this even more simply:

If the central bank lends out €10 billion (and this is the first €10bn ever created)and demands 10% interest, where the hell is the extra billion going to come from unless it too is borrowed from the central bank?

Shorter answer this time: the original money represents the capacity to buy goods/services. The extra 10% comes from the extra goods and services the borrowers are able to create using the money.

Analogy time! Say I'm growing 20 tonnes of potatoes a year on my land, and that that represents the limits of my ability to grow potatoes, because that's all the land I have. Say I also have no money. Now if the central bank of potato land creates money, and would lend me some of the money, I could buy the similarly sized bit of land next door, which currently grows thistles - and grow another 20 tonnes of potatoes on it. There's now an extra 20 tonnes of potatoes in circulation. If we pretend I'm the entire economy, then what I've done by borrowing from the bank is double the economy of potato land.

So the bank is lending to me based on the idea that I will use the money to create additional value - that is, additional things people can buy. Because there are more things to buy, and I've created them, the bank can charge me a proportion of the value of the extra things in return for the loan. The extra money the bank has created is soaked up by the extra things I've created for people to spend money on.

Developing slightly the potato-based model above. Say, again, we start off with a situation where we don't use debt-based money. There's my patch of land, on which I grow 20 tonnes, and there's a patch next door, on which another family grows 15 tonnes. Both families eat 15 tonnes every year - I create a surplus of 5 tonnes, the other family creates no surplus. The 5 tonnes of surplus potatoes I can grow every year represent the whole productivity of the potato land economy, and you can consider the 'currency' of the system to be a potato-backed one, consisting of my surplus potatoes. I'd like to buy the bit of land next door, but it would cost 500 tonnes of potatoes to do so (enough potatoes to keep the family who owns it in potatoes for the rest of their lives). My current surplus of potatoes is 5 tonnes, which means that it would take me a century to buy the land - not really worthwhile. If I could borrow 500 tonnes of potatoes from the bank, I could buy the land and start producing more potatoes - but in a non-debt money system, I can't do so, because there's only the 5 tonnes of potatoes I put into the system every year in circulation - I deposit them with the Bank of Potatoes, and have done so for 10 years, so the whole system has only 50 tonnes of potatoes to lend.

If, on the other hand, we allow the Bank of Potatoes to create debt-based money by fractional reserve lending, then the Bank of Potatoes can lend me the "500 tonnes" at 10%, even though there aren't that many potatoes in the economy. I buy the land, and I now have to pay the Bank of Potatoes back 550 tonnes of potatoes - but my surplus of potatoes is now 25 tonnes (original 5 plus the 20 from the new land), so it only takes 22 years to pay off the land, not the original century.

Say the loan period is 30 years - so every year I pay the Bank of Potatoes 18 tonnes of potatoes out of the 25 tonnes I'm now producing. They hand over 16.67 tonnes to the guy I bought the field from - so his family can eat 15 tonnes, and put the rest into circulation. In fact, since they no longer have to work to grow the potatoes, they probably eat less, and spend more, but we'll ignore that. The "economy" of potato land is now my surplus (7 tonnes) and the other family's surplus (1.67 tonnes), so the economy has grown considerably - from 5 tonnes to 8.67 tonnes of circulating potatoes.

In a sense, that looks like a sleight of hand - but it's based on the fact that I'm more productive than my neighbour, and the future value of allowing me more resources to exercise my productivity on. Debt-based money is a way of allowing the productive to mortgage the future value of their extra productivity.

You can use the same analogy to show inflation. Let's assume there's two extra workers - call them Dolly and Jim - who does laundry. They each need to eat 2.5 tonnes of potatoes (they have no other family, whereas my family and the other family have 6 people in each), so that's what they've been charging to do the laundry every year. Now that the amount of potatoes in circulation has increased, what happens to what they charge? Well, if the other family now has 1.67 tonnes to spend, they could ask Dolly and Jim to do some of their laundry (a third of as much laundry as Dolly and Jim do for me). If Dolly and Jim have extra capacity, then they'll do the extra laundry, and charge the other family the same rate per piece of laundry they do me. If, however, they don't have any extra capacity, then the other family will have to offer them more than I pay in order to have them do some laundry for them, so that they can earn the same for less washing. That cuts into the amount of laundry they do for me, but I also have extra money, so I offer them a slightly higher rate again. Eventually, we settle in a position where Dolly and Jim are charging more for the same amount of laundry simply because there's more potatoes in circulation - inflation.

cordially,
Scofflaw

masterkio

History show us all that the IMF & the banks ( any bank ) are only there to make a profit from us the people to great nations right around the world.
The power & influence of the banks is now greater than any nation in the world, Than at any other point in world history,

The international bankers have placed them selfs in a postion where they now influence policy making in nearly every country in the world,
this is done by the banks in each country having either lobbist, Special interest groups & Government officals on the banks pay-roll, or as is done in the U.S. .

Senators & Congress Officals are given large amounts of money or Promises if they vote in a particular way on a new motion, law or policy passing threw the congress.
which then of course influences local government, in ireland that would be Something Like the county councils
.
This in turn allows bankers outside of that nation to influence what laws, Rules & Regulation are passed in the country.
One of there main mechanism of control is to slowly but surely become that nations lender of money By Passing Laws & Legislation in favor of the banking system.
This is how a nation of dept is born

This is exactly what happened in 1913 with the creation of the Federal Reserve Bank in the U.S. .This legislation was created, masterminded & voted on by bankers.it effectively took control of the nations money supply.
This is historic fact.

The book - The Creature From Jekyll Island & The Documentary by the same name, Covers this in great detial
And also, the famous Documentary - The Money Masters.
which has been watched by millions, It explores the history of banking in our world today.It shows in detail how it all began & where its all going.

The European Central Bank has been created on the same idea as The Fed.
Meaning that it more or less creates money from nothing, by printing it or typeing a bunch of numbers into a keyboard & then wiring it to what ever country is looking for it.
leaving that country with a massive dept for generations to come.

This financial system today is broken cos its based on an Fraudulent out-dated monetary system that is slowly falling apart Because people are starting to understand how it all works, & the fact that we, the common people will always be the loser,

This Has Gotta Change